David Ricardo's Theories of Economics (Essay Sample)

Name: Professor: Course: Date: David Ricardo’s Theories David Ricardo was a British Political Economists and one of the most prominent figures who contributed to the development of economic theories. Born on April 18, 1772, Ricardo started his career at an early age. At 14 years, Ricardo was involved in his father’s business who was a successful stock broker. In 1793, Ricardo converted from Judaism to Christianity after marrying his longtime girlfriend, Anne Wilkinson. As a result, his family disowned him, and he stopped helping his father in the business. He then started his career as a stock broker since then. David Ricardo gained interest in economics after reading Adam Smith’s "The Wealth of Nations. Ricardo focused on economic policies and how they affect the economy. Among his theories is the labor theory of value which stated that the price of a good or service was affected by the amount of labor used in producing it. The theory of comparative advantage stated that when two countries are involved international trade, both countries benefit since a zero sum gain does not exist. Other approaches include wages, profits and rent. He distinguished his approach to economics by focusing on the theoretical and quantitative approach rather than a contextual approach. Labor Value of Money David Ricardo presented the Labor of money to prove that labor has a natural and market price. The natural price of labor refers to a rate that allows laborers to live. When an increase in the price of food occurs, the natural price of food also increases. Likewise, a decrease in the price of food results in a reduction in the natural price of labor. The natural price of labor has a tendency to rise with the progress of the society. However, the growth may be slightly altered by changes such as agricultural automation and the discovery of new markets. Their natural fall may also occasion food and other necessities, hence, a corresponding decrease in the natural price of labor. The market price of labor is the price paid for labor from the natural operation of the proportion of supply to demand. When labor is in plenty, the price paid for it is low while the price is high when labor is scarce. The condition of laborers flourishes when the market price of labor exceeds its natural price. The laborers have the power to command a lot of necessaries and, therefore, can bring up a healthy family. When a high wage rate is given and encourages the population, the labor force may increase, resulting in a decrease in the price of labor to their natural price. It may also fall below the natural price of labor if a reaction occurs. A drop in the price of labor affects the lifestyle of the laborers. The poverty experienced deprives them off the necessaries that they enjoy. It is only after an increase in demand for labor that the market price of labor will rise to the natural price, and the labors will lead a comfortable life which the natural rates of wage will afford (Pearcy 1). An improvement in society and an increase in its capital will affect the labor; the steadiness of the rise will depend on whether the natural price of labor has also increased. The increase in the natural price of labor will depend on the increase in natural prices of necessaries on which labor wages are expended. The Theory of comparative advantage The law of comparative advantage refers to the ability of a part to produce a good or service at a lower marginal and opportunity cost that the other party. The law of absolute advantage refers to the ability of one party to produce a good at a lower absolute cost. (Findlay 515). Countries engaging in international trade can create value for each other even when one of the parties can produce all goods with fewer resources as compared to the other party. David Ricardo used the example of England and Portugal to illustrate the theory of comparative advantage. Portugal employs 80 men to produce its annual wine supply. The labor value is 80 years of labor and the value of Portugal cloth production amounts to 90 years of labor (Bouare 105). In this case, years of labor represents the amounts of labor time an average worker takes in one year. England produces the same amount of cloth and wine. Ricardo assumed that England has a higher labor productivity than Portugal due to the lower labor productivity in England. England must spend 100 labor years to produce its annual supply of cloth and 120 labor years to produce its annual wine production. In Portugal, it is relatively possible to produce wine and cloth with less labor than it would cost England to produce the same quantities, i.e. Portugal will take 170 years or labor while England will take 220 Labor years. In England, it is relatively hard to produce wine and moderately difficult to produce cloth. In Portugal, both products are relatively easier to produce than in England. It is, therefore, cheaper to produce cloth in Portugal than in England. It is also cheaper for Portugal to produce excess wine and buy cloth from England. England benefits from this type of trade since it can get wine at a lower price, closer at the cost of producing cloth. In conclusion, each country can benefit from the trade by specializing in the goods they have an advantage in and trading it for the other good. Theory of Rent David Ricardo defined rent as payment for the use of the only land for the original powers of the soil. The return on the investment made by the landlord, after it is deducted from the contractual rent, what remains in called land rent. The law of rent applies to land in the urban and rural land (Sammut 4). Ricardo was mainly focusing on the economic rent and locational value and not the soil alone. Rent arises from the difference existing in the productiveness of different soils place under cultivation for the purpose of supplying to the same market. The amount of rent will be determined by the degree of productiveness of the land (Schneider 8). The productiveness depends on the fertility and location. Ricardo views the supply of land from the societal perspective. The scarcity of land gives rise to rent. If the problem of scarcity did not exist, land rent would not exist. When land units appear as homogenous, land rent arises. Therefore, land rent arises due to scarcity and quality of lands. Were the theories accurate? The arguments presented by David Ricardo have attracted criticism and support in e...